A good business plan should draw on prototyping to create a virtual world that looks and acts like the real thing. Developing product and process prototypes is the cornerstone of developing a virtual business model because prototypes facilitate the understanding of how the business will work.

I see between 30 and 40 students business plans each year. It is not unusual to hear the following complaints at least five times each year: “They just don’t understand our business model.” or “They just don’t understand what we are doing.” There are many reasons that they do not  understand, including the idea might be flawed, the business idea needs to be refined, or they have simply not communicated their business concept in a clear manner.

The business plan is often the centerpiece of communicating the business model to outsiders such as investors, family, friends and other interested parties (see Figure 1). A more important use of the business plan and the executive summary is that they serve as communications platforms among the founders. It is, after all, the interplay and social dynamics among the founders that are the keys to success ( see Jennifer Houser on How to Build an Insanely Great Founding Team).

The evolution of the business model and the business plan involves hard work, but there are tools that can improve communication and facilitate the process. Prototyping, in one of its various incarnations is the centerpiece of these tools.

Prototypes are usually associated with the development of products and services. With successive iterations, or stepwise refinement, a prototype becomes more and more like a real product or service. Prototyping can also be applied to the development of the business model. With successive iterations, or stepwise refinement, a prototyped business becomes more and more like a real business. It is rarely feasible to build the product, service or entire business without some type of stepwise refinement. The executive summary, the business plan pitch and the business plan itself are not the actual business, but are actually models of what the business will produce and how it will function.

Ideas evolve over time. Prototyping is a very powerful tool because it facilitates learning and understanding and it reduces the length of time of the evolutionary process. Prototyping involves experimentation and encourages the evolution of ideas and leads to insight into the design of a viable product, a service and the business model. A blend of learning-by-doing (prototyping) and learning-about (education, reading, searching and synthesizing) is necessary and the foundation of the creative process. Research has cosnsistently shown that prototyping and collaboration facilitates the mutual and concurrent learning processes of all of the individuals involved and that it results in strong feelings of ownership towards the product, service or business model.

There are a variety of ways that prototyping and stepwise refinement can be used to develop a business model and new products and services. Here is one approach that is characteristic of how prototyping can be implemented.

1. Initial Prototype: In the early stages, develop a pencil and paper picture of the product, the application or the process. The key is to focus on the vital and essential functions of the product or service.
2. Review by Interested Parties: Let business stakeholders, family, friends and potential customers provide feedback on the product or service.
3. Revise and redesign prototype: Use the feedback to refine and improve the design of the product or service. Use more advanced tools as the prototype becomes more refined and detailed. This usually leads to the use of graphics, drawings and mock-up software. Towards the later stages of development, the prototype might be a functioning product or service or an actual application with some level of functionality.
4. Go back to step 2 after revising and redesigning the prototype.

Services and businesses processes can also be prototyped. There are a number of tools that can be used to conceptualize, design, and test the design of the service including drawings, sketches, scenario analysis and task structuring, mock-ups, storyboarding, systems, Lego mock-ups, and other tools including simulation (see http://www.servicedesigntools.org/repository ). One popular tool for designing services is service blueprinting. It is a visual and descriptive tool for modeling visible customer interactions with employees and processes that also illustrates how the hidden processes support the customer interactions.

In summary, prototyping and prototypes are very effective tools for facilitating the evolution of ideas and for presenting a virtual world, a virtual business, a virtual product or virtual service to interested parties.

In the last couple of years I have focused on having the student groups develop prototypes for their business plans. The results have been outstanding. Check out the business plans and presentations on my SkyDrive here. Also check out Chapters 6 and 7 for additional discussion on the role of prototyping in innovation and creativity.

Figure 1 Innovation, Learning and New Product Development